Question

Exercise 12-13: Sell or Process Further

Wexpro Inc. produces several products from processing 1 ton of clypton, a rare mineral. Material and processing costs total $60,000 per ton, one-fourth of which is allocated to product X15. 7,000 units of product X15 are produced from each ton of clypton. The units can either be sold at the split-off point for $9 each, or processed further at a total cost of $9,500 and then sold for $12 each.

Required:

Should product X15 be processed further or sold at the spilt-off point?

Answer 1

Selling price of product X15 at the split off point = $9 per unit

Number of units produced of X15 = 7,000

If X15 is processed further, incremental cost would be = $9,500

Selling price per unit after split off would be = $12

Incremental sales revenue after further processing = Number of units produced of X15 x (Selling price per unit after split off - Selling price of product X15 at the split off point)

= 7,000 x (12 - 9)

= $21,000

Incremental gain after further processing = Incremental sales revenue after further processing - X15 is processed further, incremental cost

= 21,000 - 9,500

= $11,500

Hence, Product X15 should be processed further.

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